What Is Construction Accounting?
Construction accounting is a type of project-based financial management specifically designed to address the needs of the construction industry. Unlike standard accounting, which focuses on business-wide income and expenses, construction accounting revolves around individual jobs, requiring detailed tracking of labor, materials, change orders, and subcontractor costs over long project timelines.
Given the complexity of the industry—with its mobile workforce, progress billing, and retainage agreements—construction companies need accounting systems that deliver real-time insights on a per-project basis.
Why Construction Firms Need Specialized Accounting
- Project Complexity: Each job functions almost like a standalone business, requiring customized cost tracking and budgeting.
- Real-time Financial Tracking: Day-to-day decisions depend on up-to-date job costing, cash flow status, and WIP (Work-in-Progress) reporting.
- Regulatory Compliance: Construction firms must comply with industry-specific regulations, including IRS guidelines and ASC 606 revenue recognition standards.
Project-Based Accounting Explained
At the heart of construction accounting is project-based accounting, a method that tracks all financial activity on a per-project basis rather than at the company level.
- Job Costing: Accurate estimation and tracking of costs (labor, materials, equipment, subcontractors) for each project phase to control profitability.
- Change Order Management: Adjust bids and budgets in real time to reflect approved changes in the project scope.
- Progress Billing & Retainage: Invoicing clients based on work completed, and holding back a percentage (retainage) until project completion to guarantee performance.
Revenue Recognition Methods
Unlike retail or service industries where revenue is recognized immediately, construction firms follow specific methods, each with unique tax and compliance implications.
- Percentage-of-Completion (POC) Method: Revenue is recognized based on the percentage of the job completed. This method provides a more accurate representation of earned profits.
- Completed Contract Method: Revenue is recognized only once the entire contract is fulfilled. Typically used for short-term projects or by smaller firms.
- ASC 606 Compliance: Firms must recognize revenue based on performance obligations laid out in contracts, improving transparency and consistency across industries.
Key Regulatory Standards
Regulatory bodies like the IRS and FASB enforce accounting standards that govern how construction companies track and report financial activity.
- IRS Guidelines: Rules vary based on company size and type. For example, large contractors must generally use the POC method.
- FASB Rules: The Financial Accounting Standards Board mandates proper revenue recognition under ASC 606.
- Retainage Accounting: Special attention is needed to track retainage amounts withheld and released per contract terms—critical for cash flow and compliance.
Overview of the Software Landscape
Generic accounting tools like QuickBooks Pro or Excel are insufficient for managing the complexities of construction projects. Today’s best construction accounting software includes advanced features geared toward job costing, subcontractor coordination, and mobile connectivity.
- Essential Features: Support for time tracking, equipment costing, progress billing, change order integration, and subcontractor workflows.
- Integration Capabilities: Compatibility with project management tools, CRM systems, and BIM platforms offer a unified data environment.
- Cloud-Based Systems: Offer field-to-office sync, mobile access, and auto-updated compliance tools.
Best Accounting Software for Construction Firms
- QuickBooks for Contractors: Ideal for small-to-midsized businesses. Allows for simplified job costing, expense categorization, invoicing, and retainage tracking.
- Sage 100 Contractor: A mid-tier solution with integrated payroll, project management, and service management modules for better financial control.
- Sage 300 Construction and Real Estate (CRE): Suited for enterprise-level firms. Offers extensive reporting, forecasting, project scheduling, and compliance tools.
- Procore: A cloud-based, full-suite solution integrating project management with accounting modules for seamless collaboration across departments.
- Viewpoint & Jonas Construction: These platforms offer construction-specific functionalities including scheduling, job costing, and enterprise-level financial reporting.
Cloud Adoption Accelerates
More construction firms are adopting cloud-based accounting for construction to enable scalability, real-time access, and centralized data systems.
- Field-to-Office Sync: Mobile platforms improve data accuracy and response time by enabling teams to enter cost data on-site.
- Remote Access: Cloud access ensures collaboration among remote teams, accounting staff, and project managers.
Market Growth Outlook
According to industry research, the construction accounting software market is expected to grow at a CAGR of 8–10% from 2023 to 2030. This demand is driven by increasing complexity in construction operations and a corresponding need for tech-integrated financial management.
- More than 60% of mid-to-large firms currently use specialized construction accounting tools.
- Over 70% are considering upgrades or switching platforms in the next two years.
Integration with Other Construction Technologies
Today’s leading platforms are integrating with tools like Building Information Modeling (BIM), ERP systems, and project management solutions. This creates an ecosystem where financial, operational, and design data coexist—improving budget control, forecasting, and timeline accuracy.
Common Challenges
- Legacy Systems: Older software often lacks the functionality or integration capabilities needed for modern workflows.
- Staff Training: Teams must be trained to adopt and fully utilize new systems, which can be time-consuming and disruptive.
- Compliance Complexity: Regulations change frequently, and staying up to date requires effort and investment in training and software updates.
Opportunities for Innovation
- Automation and AI: Predictive analytics and AI-driven forecasting can help project and mitigate cost overruns.
- Real-Time Dashboards: Customizable interfaces deliver actionable financial KPIs across roles and projects.
- Mobile Solutions: Increased adoption of mobile apps empowers field staff to communicate directly with finance departments, reducing delays.
Construction accounting is more than just bookkeeping—it’s the backbone of financial control in a highly volatile industry. As projects grow in complexity, the need for job-specific accounting methods, accurate revenue recognition, and regulatory compliance increases dramatically.
By embracing cloud-based, integrated, and mobile-enabled accounting platforms in 2024, firms can gain real-time insight, cut operational costs, remain compliant, and scale with confidence. Investing in the right construction financial management tools is not just a best practice—it’s a competitive necessity.
What is the difference between construction accounting and regular accounting?
Traditional accounting tracks business-wide finances, while construction accounting is project-centric, involving job costing, revenue recognition over time, and retainage tracking.
What is retainage and how is it tracked?
Retainage is a portion of a construction payment withheld until the project is completed, ensuring project requirements are met. Specialized accounting software tracks withheld amounts and releases them as milestones are achieved.
Which software is best for large construction companies?
Large firms typically benefit from robust platforms such as Sage 300 CRE, Viewpoint, or Procore accounting—offering comprehensive project management, financials, and integrations.
How does ASC 606 impact construction accounting?
ASC 606 standardizes how revenue is recognized from contracts, requiring construction firms to identify performance obligations and report revenue in alignment with contract completion stages.